Pivotal Events

By Bob Hoye

Institutional Advisors

May 27, 2009

The following is part of Pivotal Events that was published for our subscribers May 21, 2009.

Signs Of The Times:

Last Year:

"Is the Financial Crisis Over?"

This was the headline on the Investment Round Table held in Singapore on May 15, 2008. Jesper Koll, the head of Tantallon Research in Japan, gushed about the Fed's handling of last year's crisis:

"US policymakers deserve the Nobel Prize for applied economics. The policy response to financial asset deflation was not only extremely fast, but extremely well coordinated... [And] the second-round effects of asset deflation have been contained."

There is something about interventionist theories that to certain mentalities seems the equivalent to cat nip – particularly in May, which can often record a financial "silly season".

Well, we are not sure about Koll's count on "second-round" effects, but by our count this is the first big rebound out of a classic fall crash, that typically become enthusiastic in May. This was the case in 1930 and 1874.

Also, there is another "count" running. The high for the stock market was in October 2007, which was some 20 months ago. Twenty months after the end of the bubbles in September 1929 and September 1873 counts out to May of 1931 and May of 1875 when those post-bubble contractions began another nasty phase.

With appropriately-timed "joy" being expressed now, another turn to disaster seems difficult to avoid.

*   *   *   *   *

This Year:

News reports show considerable contrast. Some are of economic disaster, but by way of always late reporting are of an historical nature. Others, with more immediacy, are very bullish.

"Evidence is piling up that the worst of the recession is over."

– AP, May 8, 2009

 "Recovery to be A Powerful V-Shaped Recovery"

– Bank of England, Telegraph, May 10, 2009

"Credit Crunch Dulls Glitz of Cannes Festival: Parties Cancelled, Yachts Empty"

– Reuters, May 19, 2009

"World Regains Taste For Risk"

– Wall Street Journal, May 11, 2009

"White House Sees 3.5% Growth by Year-End"

– Bloomberg, May 11, 2009

Well, we wondered where Abby Joseph Cohen would end up.

"China Optimism Prompts Investors to Load Up on Commodities"

– BMO Global Commodity Strategy, May 12, 2009

*   *   *   *   *

STOCK MARKETS

You can feel the excitement. The financial world is as it ought to be and last fall's classic crash was just a modest speed bump on prosperity's natural road. However, we have been expecting a classic rebound out to around May – and this we have, such that the S&P has generated a good overbought on our Summation thing. This is within a downtrend. The Upside Exhaustion readings register at cyclical highs.

Stock market sentiment is high, and flying with official sentiment about the economy. Support has also been expected from stronger base metal and crude oil prices, which is the case. Of course, this would be accompanied by the elixir of a weaker dollar.

We are reaching extremes for the move, and now we look for change. One big one would be the S&P setting a new weekly low, but there could be others before that.

Of interest is yesterday's downtick in metal prices. Zinc fell 4.7% as lead plummeted 6%, which makes one think about lead canaries in a coal mine.

There is some irony in this section's opening paragraph about things being as they ought to be. The street thinks that this "ought" to last, ours is that it is the set up for the next phase of the contraction that has been likely to become evident after June.

Of course, not all sectors will peak at the same time, and our advice is that while the panics provided buying opportunity this month's action is providing the exit.

More specifically, we bought the banks (BKX) in early March for the rebound, and exited the position at the double in mid-April. On April 23 we noted that the high needed a test and that one was exuberant on the rush to 43.  Taking out 36 would turn the bank index down.

Our proprietary Bank Trading Guide, which turned up from 120 early in the year rallied to 154 on May 12. This has corrected to 149 and if this turns down it would be a technical  "sell" on most banks.

Base Metal Prices extended the decline today, encompassing all five that we monitor. After plunging 6% yesterday, lead fell 1% today, which says that the canary died. Our index (excluding nickel) reached 423 on April 15, corrected to 371 at the end of April. The rebound made it to 425 on May 7, and is at 399 today. The 6% decline is interesting and taking out 385 sets the downtrend.

Our May 7 edition concluded: "Momentum for metals is at levels seen at previous important highs and for stocks it is exceptional – at the right time for selling." That edition also noted the Upside Exhaustion reading for copper, that had not been seen since the cyclical high two years ago. The red metal reached 4.25 and a test and rolling top would be the killer pattern. This is working out.

Mining stocks (SPTMN) set their high at 609 on May 8, and slumped to 494  on Friday. The test made it to 574 and, obviously, taking out 494 sets the downtrend.

bobhoye@institutionaladvisors.com

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